"IF YOU DO NOT CHANGE YOUR DIRECTION, YOU WILL END UP EXACTLY WHERE YOU ARE HEADED" - Ancient Proverb

By Kim S. Curtis, Partner, CMP

And so the question is, just where is our economy headed?

The Fed has been busy with continued concerns on the liquidity and stability of the financial markets. As was expected, the Federal Reserve cut the Fed Funds and Discount Rates by .25%. But will it be enough to combat the red hot Retail Sales Report as well as the Producer and Consumer Price Indices which both show inflation to be much higher than expected?

Many market traders were disappointed by the Fed rate cut of just .25% as a .50% cut was anticipated. The cut was not good for the stock market as the concerns over a recession, along with the credit crunch, continue to elevate. Many experts feel that the Fed is not getting ahead of this problem.

The Fed certainly has its work cut out as they are fighting two opposing battles: Recession and Inflation. Inflation remains at reasonable levels, but even a little stronger inflation could throw this economy into a tailspin. Inflation can be an infectious disease causing turbulence, rebellion, poverty and wars. It is said that Inflation in the 1920's in Germany eventually led to WWII. During that time, prices on goods rose an inconceivable 1000 times per year. Personal savings were stripped away and a loaf of bread went from 20 Marks to 20,000 to 20,000,000. Just imagine the price of a McDonald's Big Mac going from $3.00 to $30,000 to $30,000,000! [This might be good for our country's obesity problem but that's another story]. Not so long ago in Mexico, hyperinflation caused a calamity with the peso which has led to extreme levels of poverty.

The good news is that the United States is a long way away from this type of problem, but inflation is a very serious concern. With inflation nearing its upper limits and continually moving higher, additional Fed rate cuts would add fuel to the smoldering inflation fire. So should the Fed risk a recession to ward off inflation or move to avoid recession and risk inflation?

With this being one of the hottest topics of 2008, George W. Bush is likely counting the days before it is no longer his problem.